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Congress is considering trade legislation that will hasten the economic integration of North America. President Trump has made renegotiation of the North American Free Trade Agreement a top priority.
This attention on cross-border trade is not misplaced. About $3 billion in merchandise and services cross the borders with Mexico and Canada every day now — that is an astounding $2 million every minute. About eight million American jobs depend on trade with Canada and another six million on trade with Mexico. NAFTA has allowed U.S. firms to create U.S. jobs, because 40 percent of the value of U.S. imports from Mexico and 25 percent of imports from Canada are actually made from inputs produced in the U.S.
But changes are needed in policies that make it easier for U.S. manufacturers to move operations from the U.S. to Mexico and other countries when that allows American companies to be more globally competitive. The air conditioning and heating company Carrier recently announced plans to lay off 600 people in Indiana and transfer the jobs to Mexico. Ford is moving production of its new Ford Focus model to China, instead of an earlier plan to shift small car production to Mexico, despite pressure to keep manufacturing jobs in the U.S. The shift of manufacturing jobs underscores the need for a rational set of principles that will restore credibility to our trade policies while setting priorities for the future.
Legitimate concern about weaknesses in our trade policy should not, however, obfuscate what remains the essential point: The United States has been and continues to be an advocate of free trade and gains significant economic benefits from NAFTA as do our trading partners, Canada and Mexico. A North America trade agreement is in each country’s economic interest.
From its inception, many Americans have misunderstood NAFTA. Understanding that trade is win-win helps us understand that trade with Mexico and Canada benefits all three economies.
Consider energy trade. The numbers tell an important economic story about the great benefits of energy trade that no protectionist rhetoric can disguise. Today about 7.5 percent of the natural gas produced in the U.S. is exported, and more than 60 percent of those exports go by pipeline to Mexico. Seventeen pipelines carry more than four billion cubic feet of natural gas a day to Mexico, with four additional cross-border pipelines to be completed over the next two years and many more in the planning phase. Mexico today generates 25 percent of its electricity with U.S.-supplied natural gas. Canada ships significant amounts of crude oil to U.S. refineries by rail and pipelines. And last year, the US imported 70 million megawatt-hours of hydropower from Canada.
Think about it: North America has five times more fossil fuel reserves than OPEC, which is allowing this continent to emerge as a global energy superpower. Cheap and abundant energy can help fuel an industrial revival that will make North America the world’s leading manufacturing and exporting region.
Anyone who thinks that NAFTA favors Mexico ignores the fact that U.S. energy exports to Mexico are surging. According to government statistics, the value of U.S. energy exports to Mexico in 2016 was $20.2 billion, while the value of U.S. energy imports from Mexico was $8.7 billion, resulting in total annual energy trade with our southern neighbor of nearly $29 billion, or almost $80 million every day.
Trade creates opportunities for expanded output and job creation. U.S. manufacturers recognize the enormous benefits of North American energy markets. In fact, exports of energy goods and services support the domestic manufacturing resurgence and help create jobs in the U.S. Increased energy production and exports are increasing the demand for U.S.-made equipment and machinery and, in turn, for products like steel and cement that are needed for shale-gas and oil production. By expanding the size of our domestic energy markets, tighter integration creates economies of scale that attracts private investment, lowers capital costs, and reduces energy costs for consumers and businesses.
Improvements can be made in NAFTA that are part of the process of improved relations with two of our major trading partners. Reforming and updating our trade policies is the best way to renew our commitment to free trade. The stakes for the United States (including Michigan), Mexico and Canada are high. Let’s not allow reckless protectionism to disrupt trade with our North American neighbors that is vital to our mutual economic strength and prosperity.
Mark J. Perry is a professor of economics at the Flint campus of the University of Michigan and a scholar at the American Enterprise Institute.
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